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Thursday, July 11, 2013

Ride the Biotech Boom

A research campus operated by Bristol-Myers Squibb in Princeton, New Jersey. (Photo credit: Wikipedia)

By Investment UNew York, Jul.11, hot stock picks .- I hope you had a great Fourth of July. I had a blast hanging out with family and friends. However, we had a long drive home so we missed the fireworks.

That's OK, though. I've seen plenty of fireworks in the past two weeks in the biotech sector.

Since June 24, the Amex Biotech Index (NYSE: BTK) is up over 11%. That's a solid year for most indexes. Year to date, the group is up over 34%.

Typically, biotech stocks, particularly those that deal with cancer, run up in the spring, ahead of the annual meeting of the American Society of Clinical Oncology (ASCO). At this meeting, nearly every major (and minor) player in the fight against cancer presents data from various clinical and preclinical trials.

After the ASCO meeting, which takes place the first week of June, biotech stocks usually take a breather, sometimes for the rest of the year until they start moving in anticipation of the J.P. Morgan Healthcare Conference - the first big one of the year - in early January.

Acquisition Fever Fuels Run-up

This year, biotech hit a high in mid-May and then backed off. But in late June the sector ignited. Fueling the fire was the proposed acquisition of Onyx Pharmaceuticals (Nasdaq: ONXX) by Amgen (Nasdaq: AMGN) for a 38% premium.

Onyx's management rejected the proposal and put itself up for sale. The stock opened 53% higher and has climbed a few points since.

Other cancer stocks have also soared. ImmunoGen (Nasdaq: IMGN) is up 20% in the past few weeks. And Celldex Therapeutics (Nasdaq: CLDX), which has drugs in development for brain cancer and breast cancer, has spiked 63% in just two weeks.

Fortunately, these stocks are in my Healthcare Profits Alert service, so my subscribers have been enjoying the ride higher. But there have been plenty of other biotech stocks that are not in the portfolio that have been moving up as well: Alnylam (Nasdaq: ALNY), and Immunomedics (Nasdaq: IMMU) to name just a few.

Can the run-up continue? I believe it can.

Right now there is a lot of excitement over a possible acquisition of Onyx. If the company does in fact get bought at a decent premium, that's going to make takeover speculation go into overdrive.

Plus, big pharmaceutical companies desperately need new drugs. And biotech can provide them. Smaller companies like Celldex Therapeutics can be bought at a much lower price than a larger company like Onyx. There are many small-cap biotechs with promising drugs that would not be an expensive purchase for a large pharma company like Merck (NYSE: MRK) or Bristol-Myers Squibb (NYSE: BMY).

The index recently broke out of a flag pattern. A flag is a short-term move that goes against the prevailing trend. You can see that the biotech index has been moving up since November, but in May and June the index took a break from its ascent. Now it has broken out above that flag pattern.

Flags are fairly reliable technical patterns. This one suggests that the index can still go meaningfully higher. I wouldn't be surprised to see it hit 2,300 before the move is over.

How to Play It

If you agree, there are several ways to play this move. You can buy a biotech ETF like iShares Nasdaq Biotechnology (Nasdaq: IBB); you can find some biotech stocks with promising drugs that have shown efficacy and (very important) a strong safety profile in clinical trials; or you can rely on someone to help guide you, like the readers of my Healthcare Profits Alert do.

Whichever way you go, consider putting some of your speculative money to work in this sector, as there should be more spectacular gains on the way.

Bogle wrote a letter to the editor. Here's an excerpt: Citing Benjamin Graham as the first "hedged fund" operator is an especially unfortunate example. "The trick," Mr. Rice writes, was Graham's "clever way to make money . . . whether it [the market] continued to rise, or started to fall." ...

One of my pet peeves is the way that insiders -- whether corporate CEOs, hedge fund managers, or elected politicos -- capture compensation (or credit) for normal cyclical gains they had little or nothing to do with.

This is the approach favored by the Crony Capitalists — those people pretending to be free market participants, and who merely pretend to be creating value. They are taking credit for structural successes that would have occurred with or without them. What they are actually doing is capturing value, not creating it — and then transferring it from its true owners (shareholders/investors) to themselves.

This is wrong; it is legalized theft.

If you want to see a good example of how CEOs transfer shareholder wealth to themselves, a good place to start is Roger Lowenstein’s 2004 book, Origins of the Crash: The Great Bubble and Its Undoing. The section on CEO compensation is astounding; these guys were essentially getting wildly overcompensated for being CEOs during a bull market. The prime example was the CEO of Heinz, who gave himself (with the tacit approval of his Board ofCrony Directors) a $90 million bonus. And this was back in the early 1990s, when $90 million was real money.

Earlier this year, Goldman Sachs Asset Management announced that it would launch a new mutual fund that — apparently — will bring the joy of hedge fund investing to the masses. For as little as $1,000, the Multi-Manager Alternatives Fund (GMAMX) allows mom-and-pop investors to put their life savings into some of Wall Street’s riskiest and most expensive products. This “fund of funds” will, according to its prospectus, let investors gain exposure to the trading strategies of hedge funds...

Big public pension funds reaped strong returns from their hedge fund portfolios in 2012, with most of them handily surpassing their own benchmarks and well-used industry indexes. The hedge fund portfolios, for the most part, achieved close to what chief investment officers wanted, despite a 1,500-basis-point difference between the best and worst performers, according toPensions & Investments' analysis of the returns of 19 hedge fund portfolios from 17 U.S. public retirement plans with aggregate hedge fund assets of $60.7 billion.

Something must be in the water over at 399 Park Avenue, where Daniel Loeb's hedge fund Third Point is headquartered. His Third Point Ultra fund has already gained 12.42 percent this year through the 13th of March, according to data from HSBC’s Private Bank.

The portfolio added 3.3 percent alone between March 1 and March 13. By comparison, hedge funds have returned about 4 percent year-to-date, according to HSBC.

The roughly $1.7 billion Ultra portfolio is a levered version of the firm’s flagship Offshore fund, which manages about $5.7 billion and has gained 8.5 percent over the same period. ...

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Despite low turnover, hedge funds notably reduced holdings of underperforming long-time favorites Apple and gold while raising allocations to rallying Financials. For the first time in three years AAPL was not the top stock in our VIP list, instead ranking as the third most frequent top-10 holding... Continue to read.

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